A group of plaintiffs seeking class status has filed a suit against a group of defendants, including Artex Risk Solutions and Arthur J Gallagher & Co, accusing them of being part of a massive captive insurance strategy conspiracy.
The suit, filed today in the US District Court for the District of Arizona–Phoenix Division, alleged that the defendants conspired to design, promote, sell, implement, and manage illegal tax-advantaged captive insurance strategies.
The group of defendants includes Artex, Arthur J. Gallagher & Co, TSA Holdings, TBS, Epsilon Actuarial Solutions, AmeRisk Consulting, Provincial Insurance, and various employees of the companies.
According to the defendants, the strategies provided highly rated insurance and at the same time legally reduced taxes, however, this was not the stance of the Internal Revenue Service (IRS), who determined they were illegal and abusive tax shelters.
The IRS then disallowed the tax benefits and assessed the plaintiffs with substantial back taxes, interest, and penalties.
The plaintiffs seek recovery of damages associated with their participation in the strategies.
Additionally, the suit alleges that, unbeknownst to plaintiffs, the defendants entered into undisclosed business arrangements with each other and a nationwide referral network of investment, accounting, and legal advisors, to funnel clients to them.
It says that through these arrangements, the defendants systematically identified potential or existing clients who had substantial income in a particular tax year.
The complaint accuses the defendants of unlawfully abused their positions of trust, confidence, and prestige by fraudulently inducing those clients to pay substantial fees for insurance, legal, accounting, tax, and actuarial advice, and services in connection with the strategies.
Furthermore, it is alleged that even after learning of US Tax Court decisions that disallowed deductions claimed through other captive strategies, the defendants continued to advise, promote, and encourage the plaintiffs to use captive strategies, which they assured plaintiffs complied with all applicable tax and insurance laws.
Specifically, the plaintiffs bring claims for breach of fiduciary duty, negligence, negligent misrepresentation, disgorgement, rescission, fraud, violations of the Racketeer Influenced and Corrupt Organisations Act (RICO), violations of Arizona's RICO statute, breach of contract/duty of good faith and fair dealing, civil conspiracy, and aiding and abetting breaches of fiduciary duty and fraud.
They seek actual, consequential, incidental, punitive, and treble damages; rescission and disgorgement; pre- and post-judgment interest at the highest legal rate allowed by law; and all attorneys' fees and costs in pursuing this matter.
David Deary, attorney for the plaintiffs, said that while particulars of captive strategies are complicated the defendants’ motivation is quite ordinary.
Deary stated: “Greed. Plain and simple”
“The defendants sold products and services they knew were illegal and would be disallowed as abusive and illegal tax shelters, resulting in their client sustaining substantial damages, for the sole purpose of earning significant fees and commissions.”
“And they did all this while they were supposed to be acting as loyal fiduciaries."
Deary added that the defendants’ “predatory behaviour” had “gone on for too long”.
He said: “We're asking the court to give these plaintiffs–and the potentially hundreds or thousands of other class members around the country–justice, and send a clear message to industry: these practices will not stand."